The Kiplinger Tax Letter
Washington, February 3, 2012

Taxes on high-incomers will go up next year, even though we expect that by year-end, lawmakers will vote to extend all the Bush tax cuts through 2013.
Two Medicare surtaxes are the culprits. They were enacted back in 2010 to help cover the cost of health care reform, but they take effect next year. The betting right now is that they will not be delayed when Congress agrees to extend expiring tax breaks. Although they could be nixed if the Supreme Court strikes down the entire health care law this spring, that is a real long shot. So it's best to start planning to see how these taxes will affect your situation.

The first levy is a special 3.8% Medicare surtax on unearned income of single filers with modified adjusted gross income over $200,000 and joint filers above $250,000. Modified AGI is AGI plus any excluded foreign earned income. The surtax is imposed on the smaller of the filer's net investment income or the excess of modified AGI over the thresholds. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income, but not tax free interest or payouts from retirement plans such as 401(k)s, IRAs, Roths, profit sharing plans and defined benefit plans. So annuity payouts from retirement plans are exempt. A couple with $50,000 of investment income and AGI of $280,000 will pay $1,140... 3.8% on the $30,000 excess over $250,000. A single taxpayer with AGI of $400,000 and $50,000 of investment income will pay an additional $1,900...3.8% of $50,000.

The surtax boosts the top rate on capital gains and dividends to 18.8%... the 15% nominal maximum rate that we expect will be in effect for 2013, plus 3.8%. If you sell your primary residence, only the portion of the profit over the $250,000 or $500,000 exclusion will be subject to the tax if your AGI is high enough to trigger it. The full profit on sales of rental properties and second homes can be hit by the surtax. And note that the taxable gain may push your income over the surtax thresholds.
So consider selling highly appreciated assets in 2012 instead of 2013.